Paul Krugman's presidential address to the Eastern Economic Association (The Profession and the Crisis) identifies three failures of the economics profession in the present crisis: a failure to see the crisis coming, a failure to imagine such a crisis being possible, and a failure to draw on the insights of Keynesian economics to deal with it. For Krugman, the latter is the most serious failing, and it's hard to disagree - up to know we have had a series of fanciful invocations of austerity to deal with what looks for all the world as a kind of depression. After that approach did so well in the 1930s.

Monday, October 24, 2011

It's pretty amazing how what used to be a platitude has become a taboo (at least in the US). The ever-reasonable Mark Thoma makes a restrained case for progressive taxation and gets disheartened by the aggressive bile he receives from online commenters.

Thoma points out that the US economy hasn't, by any serious measure, prospered as a result of the declining fiscal burden faced by the super-rich. But his argument also receives strong support from comparative analysis. A quick look around the advanced world shows that the most unequal societies are also the worst performers in the post-crisis scenario. In Europe, egalitarian Sweden, Holland and Germany are the strongest performers, whilst less progressive economies such as Ireland, Greece and Italy suffer (not to mention the UK). In North America, Canada is in much better shape than the US.

Friday, October 21, 2011

Nice post by Kash Mansori at The Street Light: Where Exactly Are Those Lazy Southern Europeans, Anyway? Mansori points out that there is no evidence of lazy or feckless behaviour being any more prevalent in the South than in the North - working hours, overall employment, social spending and pensions are mostly close to the European average, although welfare coverage is on the whole less generous and working hours longer.

In fact, the prevalence of the grey economy should mean that Southern Europeans are working harder than the data suggests, although this is not an argument likely to impress Northern Europeans.

Of course, Southern Europe has its problems, and its history of corrupt leaders and authoritarianism have left legacies that continue to hold the region back. But the broad picture some Northern Europeans wish to believe in, of lazy Mediterraneans exploiting their virtuous neighbours, is based entirely on ignorance.

It's hard to know if the people posting their pictures and hard-luck stories really exist, and it's certainly unlikely they are very representative. But still, it's an astonishing read: post after post describes what a miserable exploited existence these losers have had, and then goes on to express pride at never having complained about their lot or asked for any government help (or so they claim). The idea that 'occupy Wall Street' might be about them getting exploited a bit less is clearly difficult for them to grasp.

This type of reasoning is probably not that typical of today's America, and instead reveals a very high resistance to cognitive dissonance on the part of the '53%'. However, the claims that never having asked for help, even in the worst circumstances, is some kind of American virtue does seem to resonate in the US. It certainly would sound strange in Italian or Greek, or probably for that matter, in German.

Although it's important to make these arguments, and Chang does a great job of it, the dominant feeling I'm left with is dejection and frustration. Why? Because what Chang is arguing is almost self-evidently true, and should barely need saying. Indeed, 25-30 years ago much of what he argues in the book constituted the conventional wisdom. Yet the idea that markets are social constructs, that regulation is a politically loaded issue, that individual productivity is not really individual, have now become quite radical things to say.

Why? Well we know there has been a sustained assault on social democratic values over the past thirty years or so, and that has been largely successful in pushing back the frontiers of political intervention in favour of justice and fairness. But why hasn't the left fought back? Why instead have social democrats been forced onto the back foot, constantly conceding defeat and allowing the political centre to move ever-rightwards?

The reason is that the left has lost its anchor. The right can argue in favour of free markets, and can push for more 'freedom' in the knowledge that there is always a tax to be cut or a regulation to be abolished. The left, however, no longer has an objective to push towards. Instead it hangs on to what it has, and what it has is less and less as the right pushes the Overton window in its own direction.

The left has become the centre. The right, by pushing further in the direction of its most radical goals, is able to redefine continually what the centre means. The left, without its old anchor, is unable to resist being dragged reluctantly to ever more pro-market positions.

The answer has to be to find an anchor again. For me, that has to be equality. Policy has to deliver greater equality, or it's not worth pursuing. The time has come to put down some markers.

So Alan Greenspan, perhaps the key architect of today's global economy (yes, that is not a compliment), has decided to weigh in on the Eurozone crisis and in particular on the North-South dimension of Europe's problems.

It's hard to know where to start, but here goes. The least interesting part of the nonsense Greenspan talks is that he rehearses the standard story about Mediterranean profligacy, of the Southern periphery living beyond its means as it hurtled to its inevitable reckoning with the harsh reality of the bond markets. This story is still popular, despite being debunked over and over, most recently by Mansori here. It is popular, of course, for the reason that it blames the victim, a common response on the part of the supporters of free market capitalism to the crises their prescriptions generate.

What more interesting is the apparently unselfconscious Orientalism of Greenspan's assessment of the Southern countries. Greenspan's analysis of the North-South divide in Europe goes as follows:
There remains the question of whether most, or all, of the south would ever voluntarily adopt northern prudence. The future of the euro beyond a select group of northern countries with a similar culture will depend on the ability of all eurozone nations to follow suit.

What would this 'similar culture', based on 'northern prudence', involve? Well, for a start it presumably doesn't involve the Anglo-Saxon recklessness exhibited by Northern European countries such as Britain, Ireland and Iceland. So we are talking about particular areas of the North whose prudence is expressed in wage restraint and sound public finances: the countries generally referred to in the comparative political economy literature as 'social democracies'. So Alan comes out as an unexpected fan of large public sectors, high and progressive taxation, and strong trade unions. Who knew?

The counterpart of course is Southern fecklessness. Here we go back to a common refrain of blaming poor economic performance on climate. Greenspan cites approvingly the following words from Kieran Kelly:

if I lived in a country like this [Greece], I would find it hard to stir myself into a Germanic taxpaying life of capital accumulation and arduous labour. The surrounds just aren’t conducive.”

Never mind that the average yearly working hours of a Greek employee are the highest in Europe. It's just so hot, how can they ever do any work? A notion that nobody ever applies to Texas or Florida.

It's barely worth the effort of outlining all the ways in which Greenspan is wrong. But the fact that this kind of sub-racist nonsense can be given space in one of the best newspapers around is a sign of the times. The times are ugly, and what we thought was true wasn't. So why not just blame problems on those suffering them? It's a lot easier than trying to work out what went wrong, and admitting that powerful men like Greenspan didn't have the faintest clue what they were talking about.

Krugman has been berating conservative economists for some time for the tendency to see the economy as a morality play. The trouble is, the political economy is a morality play. Economic behaviour is deeply embedded in social systems within which moral claims, as well as material desires, drive human behaviour. The Eurozone could well collapse entirely because Germans find it so hard to cope with the idea that their supposedly virtuous behaviour will not bring its own reward. Krugman is right in terms of the models, but the very real presence of moral reasoning in the politics of the crisis is precisely why economic modelling alone cannot give us the answers.

Tuesday, October 4, 2011

Thinking of Italy brings me naturally to thinking about the difficulty of making democracy work for the citizens. The inability of western governments to defend the basic economic interests of large segments of the population has become clear enough over the past 5 (or 20-30 if you were paying attention) years. Of course, no political scientist would make the ridiculous claims on behalf of democracy that some economists make on behalf of free markets. But still. What exactly do we except democracy to deliver?

The clearest statement on political market efficiency I can think of is Donald Wittman's The Myth of Democratic Failure. The interesting bit about Wittman is that he makes two ambitious (to my view implausible) claims: that the rational actor model explains politics well, and that an effective and 'efficient' democracy can be explained in rational actor terms. The resulting text is an entertaining lesson in the usefulness of functionalist reasoning and ad hocery wheeled out in support of a notionally deductive theory resting on individual rational action.

But political science also makes less strong claims about democratic efficiency as a matter of course. The notion that governments could fleece the population systematically is rarely entertained. Yet at the moment this is what seems to be happening across the advanced world, with little in the way of organized reaction (as yet).

Which is the key - 'organized reaction'. Democracy requires organization - leaving political action to isolated individuals doesn't get us very far. And the difficulties of organization - the free rider dilemma, the danger of hierarchy, the asymmetric access to political influence - produce colossal inefficiencies in the political market. Political scientists need to start thinking about how these inefficiencies, coupled with economic disaster, could destabilize what we assume to be well entrenched democratic institutions.

Paul Krugman has an interesting post pointing out the usefulness of economic modelling in times of uncertainty, where

'experience — the kind of experience business people gather over years in the market –ceases to be a helpful guide, whereas models and deep historical knowledge have at least a hope of getting at what’s really going on'

I think he's right, up to a point. The problem is though, that what he's trying to model is a world in which most people have no access to the kind of abstract reasoning and deep historical knowledge he can draw on. And that can end up vitiating the models.

I can see a kind of circularity to all this. The models tell us what we should be doing, but they only work if we do what we should be doing. If we introduce the diversity of agents, then we can get somewhere: so assume very bounded rationality for consumers, investors and voters, and more 'rational rationality' on the part of policy makers, and you may get a guide to policy. But policy itself is just as subject to the boundedness of rationality.

A further irony occurs to me. The boundedness of rationality comes across in the ideologically driven hyper-rational models of 'fresh water' economists, who desperately try to cling on their rational expectations models, for (often) moralistic reasons.

Tough new bank rules are required because people like Jamie Dimon have enriched themselves beyond belief at the expense of the real economy, and will do it again given half the chance. I honestly don't want to live in the Mad Max world which would follow another round of hyper-leveraged madness from Dimon and his friends.

The striking thing about Rattner's tone - beyond the sycophancy - is the absurd expression of sympathy towards one of the most unaccountable and powerful individuals in the world. Rattner 'feels his pain' because JPMorgan 'conducted itself more responsibly than most of its peers.'

Sure, JP Morgan didn't go bust itself, but it would have done had governments allowed its counterparties to fold. And 'conducting yourself better' than other insolvent financial institutions is not a big ask. But above all, JPMorgan is one of the select bunch of too-big-to-fail institutions that would have to be bailed out if things went wrong. So how on earth can it be considered 'unfair' for Morgan to be subjected to the same rules facing the other major participants in the casino? He may have a point about shadow banking, but that point is better made if you at least are playing by the rules you demand for others.

Jamie Dimon's $16 million pay package (2010, sans bonus) is not the ideal pulpit for demanding a 'level playing field'. It is instead a measure of how the masters of the universe have entirely lost touch with the miserable reality facing the rest of us. Until some evidence of the social usefulness of Jamie Dimon can be found, I think we're entitled to view his opinion as a particularly tasteless case of chutzpah.

Monday, October 3, 2011

Wolfgang Munchau, in today's column Eurozone fix a con trick for the desperate, describes the latest solution for the Eurozone crisis as "the equivalent of putting explosives into a can, before kicking it down the road". The grounds for this are that the leverage involved in turning the European Financial Stability Facility into something powerful enough to hold back the markets turns it effectively into a CDO.

Munchau used to be a measured, cautious and conservative commentator. The fact that he is using such strong language these days totally freaks me out.

Sunday, October 2, 2011

Greece and some other countries have serious budget difficulties. But most of the European periphery also faces a current account crisis – something has to be done to increase exports or reduce imports or both. If the exchange rate can’t depreciate, wages won’t be cut, and “fiscal devaluation” proves unworkable, activity in these economies will need to slow down a great deal in order to reduce imports and bring the current account closer to balance – unless you (or the Germans) are willing to extend them large amounts of unconditional credit for the indefinite future.

And as these economies slow down, their ability to pay their government debts will increasingly be called into question.

So, it's a colossal loan or the end of the Euro. Johnson identifies Italy in particular as a problem, since under low growth and high interest rates its debt could grow pretty quickly, and it's already at the upper limit of what's sustainable. But how happy will Germans be to bail out Italy under its current leadership?